Were moving towards the end of 2023. What financial steps should you really take before time runs out?
Luckily, financial planners spend the last weeks of the year thinking about things like this. We asked many of them for their thoughts and we came up with a list of six key financial steps to take by December 31.
This advice ranges from retirement savings to insurance coverage to sensible tax shelters.
Update beneficiaries on that 401(k) or life insurance policy
Your specific investment account or life insurance policy requires you to name beneficiaries, loved ones who will receive the money upon your demise. For many of us, beneficiary designations function as an estate plan: They are legally binding and dictate what will happen to a large portion of your estate.
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Some people are unable to name beneficiaries. Births, deaths and family feuds can change the estate-planning landscape. The end of the year is a good time to take stock.
I suggest making sure your beneficiaries are up to date on your investment accounts, said Colin Day, a certified financial planner in St. Louis.
It may not be the first thing people think of, but you’ll be surrounded by loved ones during the holiday season, Day said. It’s a great reminder that you love and support these people, and you want to make sure they get your hard-earned money if anything happens.
Review your estate plan and insurance coverage
More broadly, the end of the year is a good time to review your estate plan, powers of attorney and insurance coverage, said Paul Mendelsohn, a certified public accountant in Livingston, New Jersey.
Do you have life insurance, long-term disability insurance, and long-term care insurance? Mendelsohn said. Long-term care insurance, perhaps the least known of the three, helps cover the costs of assisted living and nursing homes.
And remember, Mendelsohn said, that if one spouse has an insurance policy through work, it doesn’t cover the other spouse.
If you haven’t done so recently, schedule a meeting with an estate planning attorney to create or update your will, health care directives and other legal documents, said Niv Persaud, a certified financial planner in Atlanta.
Make charitable donations and give gifts
Charitable giving is a big part of the holidays. And the IRS allows you to deduct cash donations to qualified charities, potentially up to 60% of your income.
Donations are tax-deductible only if they go to a recognized charity. NerdWallet says you’ll need documentation for larger donations.
And charitable donations work as a tax shelter only if you itemize your deductions instead of claiming the standard deduction at tax time. (Most of us don’t itemize.)
Charitable gifts must be made before the end of the year if someone wants the deduction for 2023, said Seth Benjamin Mullikin, a certified financial planner in Charlotte, North Carolina.
The season of giving is also a great time to give financial gifts to loved ones, Mullikin said.
He said individuals can give gifts of up to $17,000 per recipient without filing a gift tax return in 2023.
According to NerdWallet, the gift tax is a federal levy on the transfer of money or property to someone who doesn’t give you something of equal value in return.
If you give more than the annual gift-tax limit, $17,000, in 2023, you must report it to the IRS.
Maximize Your Pre-Tax Retirement Savings
December is a good time to make sure you’ve maxed out your retirement plan contributions, said Katherine Valega, a certified financial planner in Winchester, Massachusetts.
Tax-advantaged retirement accounts allow investors to save a portion of their income before taxes are taken out.
But there is a limit. For Individual Retirement Accounts, or IRAs, the annual contribution limit is $6,500, or $7,500 for anyone age 50 or older.
For employer-sponsored 401(k) plans, the maximum employee contribution is higher: $22,500, or $30,000 for people 50 and older.
Those limits will increase in 2024. So now is also a good time to update your payroll deductions and IRA contributions to reflect the new caps, said Rob Schultz, a certified financial planner in Encino, Calif.
over 73? Take required minimum distributions on your retirement account
Required minimum distributions, or RMDs, are the amount you must withdraw from an IRA or 401(k) when you turn 73.
If you haven’t done so yet, you must take your required minimum distribution from your IRA by Dec. 31, said Devin Pope, a certified financial planner in Salt Lake City, Utah.
In exchange for tax benefits, the IRS requires that savers begin withdrawing from retirement plans when they reach a certain age. RMDs are a means for taxing authorities to take a deduction from your retirement account.
A financial advisor can tell you how much you need to withdraw by the end of the year, or you can consult an RMD table. Failure to withdraw funds will result in you facing 25% excise duty on the amount not encashed.
More:Half of American FSAs leave health care money on the table. Here are 10 ways to spend it.
crop tax loss
The end of another year is an ideal time for an investment strategy called tax-loss harvesting.
This technique, a key tax-time tool for the rich, turns investment losers into tax winners.
You sell an investment that has fallen, replace it with another similar investment, and take the losses to offset gains made by selling other investments.
If you have a tax deficit, harvest it, Mullikin said.
Tax-loss harvesting can reduce your taxable capital gains. It can also reduce your taxable ordinary income (such as a salary) by up to $3,000.
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Daniel De Vis covers personal finance. Remember to subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday morning,
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